The current geopolitical environment highlights the many reasons gold can thrive in any scenario. It’s a reminder to the attentive investor why gold has been the financial hedge of choice throughout recorded history. Let’s examine how gold compares with other assets when market volatility, recession, geopolitical conflict and inflation are all risks that are either on the horizon, or have already materialized.
Gold vs. “digital gold”
Bitcoin has emerged to prominence for several reasons, not the least of which is its fixed-supply cap. In January, the CPI saw its fastest monthly rise since 1982, exceeding already-pessimistic inflation expectations. Investors and even those who have previously had little to no interest in actively managing their savings are growing wary of currency depreciation. In other words, as time passes, each dollar buys noticeably less. A quick glance makes a fixed-supply asset look very appealing when trillions of dollars are being printed.
Yet, in a recent note, Goldman Sachs’ analysts called bitcoin a “risk-on inflation hedge” and gold a risk-off inflation hedge. The top crypto is, for better or for worse, infamously volatile, having recently shed 50% from its November high. With clear signals of a growth slowdown and worries over a recession, the team views a long gold position as the best way to protect oneself against market downturns. Recent history has indicated that, while bitcoin and other cryptocurrencies have tremendous growth potential, their astonishing volatility is all-too-tightly correlated with speculative, “risk-on” investments. By this measure, bitcoin isn’t a suitable hedge.
Gold as the investment of last resort
It seems that traders are equally concerned and unconcerned about a conflict between Russia and the West, the latter by proxy via Ukraine. Some estimate an only 10% chance of a true shots-fired escalation. Nevertheless, there has been no shortage of scrambling among traders. Any conflict would make riskier investments, such as equities, vulnerable to a market rout. So what are some of the options traders are exploring to cover their bases?
With the cost of defensive assets going up, investors are betting on everything from French and German stocks to safety in the U.S. dollar and the yen. But one hardly needs reminding that the stock market can never really offer protection. And in the face of the highest inflation in decades, is hedging with paper currencies really a good idea?
Roberto Lottici, fund manager at Banca Ifigest in Milan, has minimized both cost and exposure to risk by doubling the gold and silver allocation of his fund to 6%. It’s a percentage many would find conservative even in the absence of huge red flags. Nonetheless, to Lottici, it’s enough to offer peace of mind in whatever scenario unfolds.
“If the situation spirals out of control,” said Lottici, “then it’s going to be one of the very few assets that can offer protection.”
That’s just the thing with gold, though: even if the Russia-Ukraine situation unfolds in the most peaceful manner possible, Lottici won’t regret his precious metals allocation. Just the opposite, as any of the aforementioned risks stands prepared to turn gold from a hedge and into a top performer.